As businesses continue to deal with the effects of COVID-19, it is imperative to focus on the steps you can take to protect and help your business withstand the coronavirus storm. For a closer look at the filing process for business interruption claims, be sure to check out our previous articles regarding Business Interruption Loss (BIL) that covers, “Planning Your Next Steps and Setting Expectations,” as well as “Making an Insurance Claim.”

As you begin, it is essential to understand business interruption loss calculations. You can expect to arrive at your BIL by calculating key amounts like lost revenue, lost profit, and business insurance losses.

Lost Revenue

  • The first step in calculating lost revenue is to determine the “but-for revenue.” But-for revenue is an estimate of revenue the business would have earned if the loss event had not occurred.
  • There are generally four recognized methods and various other factors to consider, such as seasonality, growth and trends, and other outside factors.
  • The next step is to measure the actual revenue, which represents revenues between the loss date and the date a business resumes “normal operations.” The period between the loss date and when operations can initially resume will typically have little to no revenue. In addition, actual revenue may include income during the recovery or “ramp-up” period, which is the period between the date the business resumes normal operations and the date business income recovers to the level it would have before the event.
  • Lost revenue is determined by subtracting actual revenue from but-for revenue.

Lost Profit

  • To calculate lost profit, businesses need to determine their avoided costs. Avoided costs the incremental costs that should be deducted from lost revenues to determine lost profits. These costs are the ones that the business would have incurred in connection with the generation of its projected lost revenues. Such costs vary directly or indirectly with revenue and generally include the following:
    • Direct Costs – expenses that a business incurs to generate revenue. For example, the incremental cost to produce each “widget.” These are often referred to as “Cost of Goods Sold.”
    • Variable (or “Saved”) Expenses – expenses the insured would incur but does not have to incur and therefore “saves,” as a result of the loss event. These could include temporary labor, certain types of supplies, variable portions of franchise fees or rent, postage, or utilities.
  • Once avoided expenses have been calculated, they are subtracted from lost revenue to determine the lost profit.

BI Losses

  • The last step in determining the BI losses is to identify any extra expensesExtra expenses incurred are those expenses incurred during the period of restoration. These incurred expenses help to avoid or minimize the suspension of the business. They may also allow the business to continue operations at their original location or a replacement or temporary location.

Calculating Business Interruption Loss

But-For Revenue
(—) Actual Revenue

= Lost Revenue
(—) Avoided Costs

= Lost Profit
(+) Extra Expenses

= BI Loss

While the information above provides a high-level overview of the BIL calculation, the calculation for specific BIL claims will always vary by policy. They are, by nature, estimates and thus are subject to the judgment of the professional calculating the loss. It is also important to remember that the BIL claim process will be contentious, especially as it relates to COVID-19 claims. For additional assistance with your particular claim and support with your BIL calculation, please contact your CRI advisor.

This task force will continue to issue additional information on the current legislative and legal status of COVID-19 cases as it is released. Check out our COVID-19 Resources page for updated information.